Why would you take a loan secured by your savings account?

I see at least a few credit unions offering these savings-secured loans. I can kinda see the advantage to taking a loan against a CD with penalties for breaking, but share and savings accounts have me confused on why you’d pay that.

So, why might people take out a loan secured by liquid savings?

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2 Responses to “Why would you take a loan secured by your savings account?”

I can see that building credit is a valid reason. I would also suggest another scenario, when you have locked up money in long-term savings, with a substantial penalty for early withdrawal. If you suddenly needed money then you might save money by borrowing against the long-term deposit rather than pay the penalties. This is especially true if you needed the money only for a short time.

The purpose of taking a “secured loan” is to build credit. This might be done by someone who had a bad stain on their credit history such as a bankruptcy or foreclosure, or possibly by someone just out of school (presumably with few or no student loans),and no credit history. Not everyone needs to, or should do this, however.

The advantage for a borrower is that s/he gets to create a record of repaying a loan that will partly mitigate the bad credit history. The advantage for the bank is that it is “no risk,” because the savings account is the security for the loan. That would make it willing to “lend” to a bad credit risk.